Wal-Mart indicator warns of deflation pulse

MichaelA. Gayed

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio
manager at
Pension Partners, LLC., an
investment advisor which manages mutual funds and separate accounts according
to its ATAC (Accelerated Time and Capital) strategies focused on inflation
rotation. Prior to this role,
Gayed served as a portfolio manager for a large international investment group,
trading long/short investment ideas in an effort to capture excess returns. From
2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered
investment advisory firm that managed equity portfolios for large institutional
clients. In 2007, he launched his own long/short hedge fund,
using various trading strategies focused on taking advantage of stock market
anomalies. Follow him on Twitter @pensionpartners and YouTube
youtube.com/pensionpartners.

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On CNBC Friday, I continued to argue the correction case, specifically stating that we may be at the very start of another deflation pulse in risk assets.

Overseas markets have been considerably weaker than the U.S., defensive low-beta sectors are showing leadership, and 10-year Treasurys can't seem to definitively break above the 2% level despite the "Great Re-Allocation" hype which people seem to forget is a process, and not an event.

"You've got to keep your finger on the pulse of what your audience is thinking, and know what they'll accept from you."
—Dwayne Johnson

While the fixation by the public is on absolute price, it is inter-market behavior that provides clues about true sentiment beneath the market's surface.

Why do I say deflation pulse? Historically, volatility tends to increase when deflation expectations rise, causing the environment to favor "risk-off" investments. This is irrespective of SuperBen and the League of Extraordinary Bankers and forced reflation. This is about inter-market analysis and listening to price.

I have highlighted in the chart above junctures where Wal-Mart has outperformed the broader S&P 500.

Note that major uptrends occurred prior to the May 6, 2010, Flash Crash, before the Summer Crash of 2011, in February 2011 when bonds started rallying, and in late April 2012 before the May correction. The ratio peaked out around July as the broader risk-on environment held and has underperformed since then as stocks continued rallying and reflationary behavior took hold. Note the far right of the chart where a spurt of strength has started.

Why would Wal-Mart begin to outperform? Given the sheer size and cost competitiveness of the company, money may be favoring the stock because it is expecting slowing consumer demand and some kind of volatile juncture ahead for equities.

Slowing consumer-demand expectations may be driven by the expiration of the payroll-tax holiday, which at the margin, could dampen spending. In a way, Wal-Mart becomes a "place to hide" for long-only managers who are concerned with the near-term.

If Wal-Mart continues to perform better than the broader stock market, and various other inter-market trends confirm defensive posturing within and across various asset classes, it continues to suggest that the environment in the here and now is not favorable for risk-taking. This is a tactical call, and one based on price behavior within, what I believe, will still be a strong year for stocks overall. Our ATAC models used for managing our mutual fund and separate accounts remain defensive until behaviorally the market looks more bullish within.

As the saying goes, if it looks like a duck ...

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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